An institute that advocates for social reform has urged the ANC to consider increasing corporate tax by one percentage point to 28%; introducing a wealth and luxury goods tax alongside a small financial transactions tax; doing away with pension tax benefits; and suspending medical tax credits.
The Institute for Economic Justice (IEJ) submitted the proposals to a strategic meeting of the ANC caucus after the postponement of the government of national unity’s first budget in February over a proposal to hike VAT from 15% to 17% to cover a R60bn revenue gap.
The Johannesburg-based IEJ describes itself as a progressive economic policy think-tank committed to advancing economic justice, systemic change and the equitable distribution of resources.
Its submission, which Business Times has seen, said among the best options for the economy was a revision of the corporate income tax rate back to 28% as the lower rate had cost the country upwards of R15bn a year. It argued that a lower corporate tax rate did not have the desired effect of attracting investment.
“Restore corporate income tax to 28%. This is a good option because there is no evidence that the 27% rate had any positive effect on investment, while costing the fiscus,” the document states.
The IEJ, which is opposed to a VAT hike, was the first to suggest that the Treasury dip into foreign reserves to fund the revenue gap. This was initially rejected, with economic experts and some opposition parties charging that the reserves were not a pot of gold the government could dip into without risk.
However, the Treasury took the advice and finance minister Enoch Godongwana announced in February 2024 that the government would draw R150bn from the gold and foreign exchange contingency reserve account to pay down debt.
IEJ executive director Dr Gilad Isaacs told Business Times that it was possible to cover the R60bn shortfall without a VAT hike. He said measures could include a temporary halt of the government’s contribution to the retirement savings of civil servants, which was first mooted by labour federation Cosatu.
“While those options seem less likely than some sort of revenue increase, they do remain viable options,” Isaacs said. “[The government can] tax wealth effectively by implementing a net wealth tax which could raise R70bn to R160bn a year. Also, a small financial transactions tax (0.1%) has the potential to garner more than R40bn in revenue.”
The IEJ recommended implementing a 25% tax on luxury goods to raise R9bn a year and freezing personal income tax brackets by not adjusting them for inflation, which raised R16.3bn last year. It also recommended a resource rent tax, to raise R38bn.
The cabinet announced this week that a deal had been secured in the GNU to allow Godongwana to table the budget on Wednesday. However, DA leader John Steenhuisen said there was no agreement yet, but that the cabinet was working towards consensus.
Isaacs said South Africa had three major challenges which made a VAT hike undesirable: weak growth, inflationary pressure and high inequality.
Fixed investment will accelerate only when there is policy certainty, higher growth and properly functioning infrastructure.
— Tertia Jacobs, Investec
“A VAT hike would be likely to worsen all three aspects. A VAT increase is growth-retarding, inflationary and increases inequality. We know this from the Davis tax commission.”
He acknowledged that instituting a wealth tax would require improved data on income and earnings of wealthy South Africans, and could take 18 months to two years fully to implement.
“The wealth tax is certainly the most complex of the proposals and is not plug and play. We don’t put that forward as something that can be implemented on March 12 [budget day] and generate revenue a week later.”
The submission to the ANC also proposed the removal of medical aid tax rebates, which cost the fiscus R39bn in 2022/23, and the removal of tax breaks linked to pension contributions for those earning R750,000 a year or more, which cost the fiscus R82.6bn.
The organisation said the gold and foreign exchange contingency reserve holds more than R300bn, some of which could be drawn to finance priorities.
Investec treasury economist Tertia Jacobs said the focus of the budget should be on accelerating growth and cutting spending. She said higher taxes were being considered because of difficult political compromises, competing spending priorities and a 76.1% debt-to-GDP ratio.
“South Africans are already paying higher direct taxes than developed economies such as Scandinavia. And over the years, the government has resorted to bracket creep to raise revenues, increasing the effective tax rate paid by South Africans, which is eroding disposable incomes.”
She said raising VAT would affect consumption, even though it does not target investment or exports, which are critical if South Africa is to lift its growth potential.
Jacobs warned that a wealth tax could trigger emigration of more affluent taxpayers.
“A wealth tax is difficult to administer and an asset register is required. Income tax is paid from liquid income. The answer does not lie in a wealth tax, as it could lead to emigration of more affluent individuals, who contribute the most tax."
She said in 2024 the economy expanded by a mere 0.6%, even lower than the 0.7% recorded in 2023 amid record load-shedding. Fixed investment will accelerate only when there is policy certainty, higher growth and properly functioning infrastructure, she added.
Raymond Parsons of North-West University’s Business School said the amended budget would not only be a test for SA’s fiscal policy but an even greater test of the maturity of the GNU in reaching workable compromises which would promote fiscal sustainability and economic growth.
“High public debt, limits to taxable capacity and the need for accelerated economic reforms present the GNU with tough trade-offs and choices that cannot be avoided or postponed. Stopgap measures may help to ‘balance the books’, but such respite is bought at significant future cost and reduces the pressure for longer-term solutions,” said Parsons.
The emphasis must be on controlling spending rather than increasing the tax burden as the disastrous financial history of several economies in the past began when they got trapped in a negative “tax-and-spend” fiscal cycle, he said.
“Fiscal space in South Afrika has shrunk considerably. The best way out is for the fiscal ‘mix’ in the revised budget to be aligned as far as possible with the overarching goal of inclusive 3% GDP growth, as outlined in the GNU’s medium-term development plan.”
Efficient Group economist Dawie Roodt said a tax on luxury goods or increased VAT on luxury goods would be a bad idea because once an exception was introduced into any tax system, it opened the door to corruption and abuse.
“A wealth tax is a bad idea because it’s difficult to implement. It takes years and many countries that tried it abandoned it after a while. The fact is, the rich are paying most of the taxes as it is.”
He argued that the decrease in corporate income tax from 28% to 27% did in fact achieve the desired effect and that moving it back to 28% would be “a really bad idea”.
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